Beerconomics: More on the economics at Reading Festival

Economics, simply, is the study of incentives. It’s absolutely fascinating to me because it’s a triumph of mathematical logic over subjective guesswork. It’s applicable to every day life and it answers the big questions on how we can solve the big issues facing society today.

enjoy
Creative Commons License photo: jared

Recently, I went to Reading Festival. It’s a weekend music festival with 80,000 people. And as you can imagine, there are some huge effects on the environment from such an event. People burn and dump all kinds of things around the site, leaving both air and ground pollution behind. Not only is it bad for the environment, it’s potentially harmful to the health of the music fans who attend the festival.

I want to focus on three specific issues at Reading Festival:

  • There is a huge amount of litter around the site. People don’t bother putting their rubbish in the bin.
  • Those who are more considerate for the environment often find the bins will overflow from the sheer amount of trash. Because of the overflowing trash, the busiest parts of the arena had a very pungent foul-smelling stench. And it cost a lot of money for the festival to employ people to regularly empty the bins.
  • Some revellers at the festival insist on throwing the contents of their drinks over huge crowds of people, especially in crowded tents. This is a huge nuisance and it’s highly unhygenic. Several friends of mine have told me of instances of people relieving themselves in paper cups and then throwing these over crowds of people – frankly a very disgusting and antisocial thing to do. There is also a risk of injury to the person hit by the bottle/cup.

The festival has a paper cup deposit scheme. The scheme is very simple and straightforward and in my opinion did a great job at changing some of the incentives to reduce litter and anti-social behavior.

It worked by placing a deposit of 10p on the cup which each drink was sold in. A pint of beer would cost somewhere in the region of £3.50 ($7) which would include 10p which would be refunded when the cup was returned.

This created positive incentives for several different groups of people.

Those who’d have littered:

easy money
Creative Commons License photo: bobcat rock

The 10p deposit multiplied by the number of drinks consumed over the whole weekend and the number of people in the group would have added up to a fair bit of money. I saw many people who had stacked up whole piles of cups in their backpacks, obviously with the intention of getting their deposits back at the end.

Some people would continue to litter. They would lose their 10p deposit which goes into the coffers to employ somebody who would tidy up the litter.

Those who were anti-social:

The deposit also creates a disincentive to throw the contents of your drink over large crowds of people for the same reasons: you’d never get your 10p back. I would say that this is actually quite a weak incentive as I still saw a fair amount of this happening. Whether me and my friends were drenched in cups of beer, water or urine I’ll never know. But whatever it was, I’m sure it would have been more of a frequent occurance if the deposit system didn’t exist to encourage people to hold on to their empty drink cups.

Those who were environmentally conscious:

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Creative Commons License photo: Matthew Johnston

I’d like to believe the vast majority of people would look for a bin to throw their rubbish into. For those people, it wouldn’t be any harder for them to hand them in to get a 10p deposit back instead. It’s a great way of rewarding environmentally conscious behaviour.

There are even more environmentally conscious people in society who would pick up other people’s litter in order to keep their own towns, cities and streets clean. Unfortunately, this doesn’t happen at festivals because nobody actually lives there – for 360 days a year, they don’t benefit from a cleaner environment at Reading Festival.

The 10p deposit rewarded these more environmentally conscious people and gave them incentives to keep the place tidy. I saw two enterprising girls who, in the interval between two acts, walked through the arena collecting the cups which people had left behind or thrown. They could probably have got a free lunch from the amount of deposit money recieved from returning the cups.

For the festival organisers:

The scheme costs very little. It saves the festival organisers money – the bins don’t fill up as quickly and litter in busy areas (where it would cause the most discomfort to revellers) would quickly be picked up by the revellers themselves. And there is no reason to think that the 10p price hike on all drinks would have caused a fall in sales, because everybody knew they’d get that money back.

Conclusions

Grapefruit Splash
Creative Commons License photo: Steven Fernandez

This, in my opinion, is economics at it’s best. A scheme which benefits everybody – the organisers who recieve additional funds towards cleanup and have less to cleanup, the music fans who benefit from a more hygenic festival experience and the entrepreneurs who benefit from free lunches at the same time as helping to keep the environment clean. Best of all, it barely costs anybody anything.

Some of the big problems facing society today such as the environment can be solved with bottom-up approaches, harnessing the power of crowd-sourcing and economic incentives. These solutions are simpler, cheaper and infinitely more effective than the centrally-planned approaches such as employing huge armies of litter pickers. That, to me, is the beauty of good economics.

Music Festival Rip-Off?

Mud
Creative Commons License photo: burge5000

I’m going to Reading Festival this weekend which 80,000 music fans are expected to attend. It’s my second music festival and I can’t wait! Reading Festival certainly isn’t cheap. For many teenagers of my age with only part-time jobs, the cost of Reading Festival (£155 + p&p, other spending) is at least a whole months wages. £155 could buy a lot else. So are music festivals a big rip off? Well, obviously it’s a personal and a subjective opinion. I’d argue that at £155, it’s great value. Here’s why.

Two facts: Tickets for Reading Festival sold out very quickly – less than two hours. Tickets on the black market (eBay) have gone as high as £300 each. A friend of mine was offered £500 for his ticket.

As an economist, this indicates to me that, in fact, music festival tickets are under priced. In economics, we have something which is called the equilibrium price. This is the price for which supply equals demand. For example, if 80,000 people want a ticket at a price and 80,000 tickets are available at that price, the market is said to be in equilibrium.

Carling Leeds Festival 2004
Creative Commons License photo: Ian Wilson

In the case of Reading Festival, it is obvious that at the price of £155, more people want tickets than the number of tickets which are available. So the organisers could increase the price of a ticket and still sell out to capacity.

Why is that a problem? Surely the fact that tickets are “too cheap” is good news for festival goers such as you and I. We’re saving money after all aren’t we? Kind of.

Firstly, it’s a waste of everybody’s time to queue up overnight for tickets, or to have to keep refreshing a website to buy them.

Secondly, there is the problem of the black market. People are buying tickets for £155 and selling them on the black market (i.e. eBay) for double that. That means £150 of profit has gone towards a ticket tout, who has served no useful purpose at all, as opposed to towards the organisers who could put the money into improving the festival for everyone.

Roskilde Festival 2004 - Det første indtryk
Creative Commons License photo: Stig Nygaard

The black market is also a dangerous and difficult place to deal. Many fans bought tickets on unofficial sites such as SOS Tickets and never received them. They’re now disappointed they can’t go and may have difficulty in getting their money back. And the sole reason why people had to turn to the black market in the first place is because they can’t get them from legitimate agents, so it’s as a direct result of below equilibrium prices.

There are several reasons why Reading festival may have been under priced. It’s possible that the organisers wanted publicity from queues outside stores, and being able to announce that it sold out within 2 hours on the news headlines. Or they simply didn’t expect demand to be so high.

Reading Festival tickets are cheaper than they should be. For the lucky ones amongst us who were at the front of the line to get tickets, that’s great news – we’re getting a bargain. But for everyone else, it’s bad news. It leads to a secondary market, and that’s a recipe for being ripped off, scammed and paying vastly over-the-odd sums: most of which doesn’t even go to the festival organisers.

Economic Warfare

Dollars !
Creative Commons License photo: pfala

When I was in America I saw a television news chat show where some of the contributors were suggesting that the US was under “economic attack”. That is instead of using guns to fight back in the “War on Terror”, rogue states were deliberately increasing the prices of food and gas to cripple the US economy. It sounds a little ridiculous to me but the idea of fighting a war by attacking an economy isn’t a new idea.

In World War 2, there was a German plan called Operation Bernhard. The aim was to attack the British economy by flooding the country with forged British banknotes. The forged currency would have served two purposes. The British would sell goods (exports) in exchange for counterfeit currency which is obviously no use.

Secondly, an excessive amount of money would lead to inflation. For those who do not study economics, when there is more money chasing the same amount of goods, prices must rise. This is inflation. We only have to look at Zimbabwe to see an example of how much harm inflation can do to an economy. When inflation and uncertainty is high, businesses might not have the confidence to produce the products which people need and we can see why that’s a big problem. If they’re not producing the products, then unemployment goes up too.

The CIA believe that the North Koreans are printing counterfeit US currency (superdollars) to destabilise the US economy.

But it’s not just counterfeit currency: so much of the functioning of our economy relies on confidence.

Geld
Creative Commons License photo: Henry.

If people expect shares to fall, they sell them. By selling them, they cause them to fall. It’s a self-fulfilling prophecy.

If we think inflation will be 10% next year, we’ll all ask for a 10% pay rise so that our real take home pay doesn’t fall. But if we all ask for 10% pay rises, that’ll lead to 10% inflation. Another self-fulfilling prophecy.

Isn’t it concievable to think that by planting false information and priming people to believe negative things about the economy, someone could do some serious harm to our economy?

Perhaps it isn’t such a ridiculous suggestion after all. I don’t believe that the credit crunch and rising fuel & food costs are due to “economic terrorism”. But I wouldn’t be surprised if it became a major instrument of warfare alongside cyber warfare in the future.

Similarly, we must ask the same questions about economic warfare as we must ask about cyber warfare.

  • Does economic warfare or an economic attack count as a declaration of war?
  • Is a country allowed to respond to an economic attack through conventional means?

How Distributed Grid Computing Could Cut Costs and Help the Environment

Cat-5 Cable
Creative Commons License photo: Darren Hester

The dream of distributed computing (or grid computing) is that it can cut the costs of computing and cut carbon emissions. In this post, I am to explain how it works.

Let us imagine a scenario where both Carl and Daniel have computers. Carl has a computer which is twice as efficient – that is it costs him half as much to do the same thing on his computer. Let’s say it costs £1 in electricity for Carl to run a computer model; and £2 for Daniel. In total, it costs £3 to society to run the computer model once for Carl and once for Daniel.

Cost to Carl: £1
Cost to Daniel: £2
Total Cost to Society: £3

With Distributed Computing

Now imagine the same scenario but with one addition: distributed computing. As it costs Carl less money to run the model on his computer than it would cost Daniel, Daniel could pay Carl to run the model for him. Imagine that Daniel paid Carl £1.50. It only costs Carl £1 to run the model Daniel’s model for him, but he has gained £1.50 for his effort giving him a profit of 50p. Daniel only spends £1.50 to have his model run, as opposed to the £2 which it would have cost him to run the model himself.

Everybody benefits by saving money and the end result is the same: Carl and Daniel have both had their model run.

Cost to Carl: 50p (£1 to run his own model, subtract 50p profit from running Daniel’s model)
Cost to Daniel: £1.50 (He pays Carl £1.50 to run his model for him)
Total Cost to Society: £2

What assumptions have we made?

DC-10-30F
Creative Commons License photo: Ack Ook

There are no costs involved in the transaction itself. Imagine that it costs £2 for Daniel to send a copy of the computer model to Carl and then to receive the results. If Daniel had to print out instructions on how to use the model, then FedEx it to Carl and wait several weeks to see the results of the model, that’s perfectly conceivable. In this case, it costs of Daniel asking Carl to run the model for him would be £3 (£1 for Carl to run the model on his computer and £2 in transaction costs). In this case, he might as well have run it himself. Real world transaction costs would include slow network connections and incompatibilities between different computer systems. So for distributed computing to work we need fast, reliable network connections and software compatibility.

Daniel would happily allow Carl to run the model for him. Are there privacy implications for example? Daniel must be confident that he can allow Carl to run the model for him and be equally confident that Carl couldn’t have a peek at the results of his model. After all, there might be trade secrets in there. Similarly, Carl must be confident that Daniel isn’t sending him malicious software which could break his computer. For distributed computing to work, there must be a foolproof and hackproof way for Carl and Daniel to trust each another to keep to their side of the bargain.

Servers
Creative Commons License photo: JohnSeb

Thirdly, Daniel must actually be able to cut his costs. Let me explain. It’s possible that Daniel will have his computer on 24/7 anyway. That is, it’ll cost him £2 whether he’s runs the model or not. If he’s leaving his computer running at 100% but idle and still asks Carl to run the model for him, he essentially pays for the model to be run twice. My computer doesn’t dynamically underclock so whether or not I’m using it, it’s eating up the same amount of energy. For distributed computing to work, our own computers must make much more efficient use of resources. We need to have thin-client computers with neglible costs.

The real world

Distributed computing hasn’t taken off yet on any large scale. The three conditions don’t yet exist:

  • We need fast, reliable network connections and software compatibility. This definitely doesn’t exist at the moment: I don’t trust my own network connection to be 99.9999% reliable. It’s OK for downloading files and sending e-mails but it needs to be good enough for me to be able to send entire computer programmes over the network in under a second. Additionally, software isn’t at the stage where it’s “write once, run anywhere”. We need standards, standards and standards.
  • There must be a foolproof and hackproof way for Carl and Daniel to trust each another to keep to their side of the bargain. There is no way I would let anybody run a piece of software on my computer without me checking it first. If I had to pre-approve every single piece of software, that adds to the transaction costs which I discuss. Virtual machines are one way we can get around this issue by creating safe ways to isolate software and to track it’s progress. Still, I’m not sure if there is a secure way to run software on a computer with the confidence that the owner of the computer can’t take a peek. And I’m not sure if we’ll ever reach the point where people will happily allow third-parties to run software on their computer and have no possible way to find out what it’s doing.
  • We need to have thin-client computers with negligible costs. I’ve already debunked this one. My computer uses exactly the same amount of power whether it’s active or idle. I don’t believe that people will drop the idea of “a computer on every desk in every home” until they are confident the first two criteria have been met. Only then will they accept owning a thin-client computer.

It’s already being used…

Last year I worked at a company which employed distributed computing on a smaller scale. They had a small cluster (~20 computers) with identical hardware, each linked with Gigabit Ethernet. Software ran inside virtual machines and those virtual machines moved around between computers depending on the amount of spare capacity each one had.

The reason why they could employ distributed computing is because within their own system, they knew that:

  • They had a reliable intranet connection and because all the computers were identical software worked on every single computer.
  • Because they only ran a limited number of programmes and all the computers were under their own control, there were no trust issues.

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Creative Commons License photo: Petrick2008

Distributed and grid computing isn’t yet practical on a worldwide scale but I think we’re making progress. Networks are becoming more reliable. Software platforms appear to be becoming more standardised. Virtual machines are coming of age. And our computers are becoming more environmentally concious and adapting their resource usage to the amount of processing power required.

So there is the blueprint to how we can lower the costs of computing. You might be wondering what that’s got to do with the environment. Well, simply replace the £ sign with Joules of energy. Like free-market trade can leads to an efficient allocation of resources in the real world, the trade of computer time in a distributed grid of computers leads to a more efficient allocation of computing resources. And that lowers the energy consumption of computing and it’s environmental impact.

Social Capital and Social Networking

Colombia, the only risk is wanting to stay
Creative Commons License photo: *L*u*z*a*

There is some fascinating research from Michigan State University about the use of online social networking sites by college students and the effect on their social capital. For non-economists, social capital is one of the three types of capital or “wealth”. The other two types are physical capital (what you own e.g. a computer, machines, money) and human capital (skills, experience). The third type of capital is your social connections – or social capital.

The study found that Facebook allows people to keep in contact with communities more efficiently, hence increasing their social capital. The authors of the study wrote, “Social capital has been linked to a variety of positive social outcomes, such as better public health, lower crime rates, and more efficient financial markets.” In addition, there was a correlation between Facebook usage and psychological well-being.

Of course, Facebook started off as a social networking site for college students only. Hence, it encouraged people to develop their relationships with people within their local college communities and people who they know offline which is more useful social capital than that which would be gained through forums and sites such as Digg.

Mindless
Creative Commons License photo: Kate_A

The study goes on to look at two different types of social capital: bonding (cementing networks of homogenous groups of people) and bridging (social networks of socially heterogeneous groups of people). The argument is that some types of social capital are bad: criminal gangs, racist and extremist groups have high levels of bonding capital. The study found that Facebook tends to generate the good type of social capital: bridging.

Perhaps my criticism of the study is how it can be shown that Facebook causes an increase in social capital. To me, it seems pretty likely also that people with greater social capital will be more likely to sign up to Facebook.

But it’s certainly an interesting study. There certainly hasn’t been much study in the general area but I think it’s an area which needs studying: just as the web allowed us to enhance our human capital by learning more about different kinds of things, the social web will allow us to enhance social capital.

The “social web” may have drastic implications for our society and economy.

A Utopian Star Trek Society – Making Economics Redundant

les années sans lumiere
Creative Commons License photo: izarbeltza

The society of Star Trek invented by Gene Roddenberry is sometimes held up by fans as something we should strive towards. In the Star Trek universe, they don’t use money: people strive towards bettering themselves and humanity. Doesn’t that sound like communism to you?

If we tried to apply these principles in our world today, it certainly wouldn’t work. That’s been demonstrated in communism. Money is a much better way to carry out transactions than bartering: with bartering there needs to be a double-coincidence of wants. A baker may barter a few loaves of bread in exchange for a haircut with a hairdresser. Now, the baker only needs his hair cut once every month or two. Between haircuts, the hairdresser has nothing to barter and thus cannot have any bread on the table.

As for striving towards bettering ourselves and humanity? It doesn’t work in communism: communism gives people incentives to do as little as possible as they aren’t individually rewarded. Free-market economics (or capitalism) works simply because it gives people individual incentives to work and perform better: wages for workers, profits for companies and dividends for shareholders. Economics uses the fact that people act in their own self-interest to lead to an optimal outcome for society. I’d argue that economics is the single most important invention ever: one which paved the way for science, technology and pretty much every single aspect of life we experience today.

I was watching Visions of the Future on the BBC the other day and it did lead me to wonder whether we might be on the verge of this Star Trek age where we might be able to do without money. There are two bits of technology which I believe would allow this to happen.

totality bites
Creative Commons License photo: mugley

First of all, nuclear fusion. Nuclear fusion promises to be an abundant source of energy which is inexhaustible. Limitless and pollution-free, nuclear fusion could render the assumption of scarcity in economics out of date (that society doesn’t have enough resources to meet human wants). With an infinite amount of energy, we could do anything: mitigate global warming, travel to other planets, whatever we like.

Secondly, molecular assemblers or “replicators” as they are known in Star Trek. The development of replicators depends on further research into nanotechnology but the promise is that they can produce more or less anything at the touch of a button by constructing objects atom by atom. The only limitations would be the amount of energy required to replicate the objects and knowing what we want to produce with them.

Many scientists believe that nuclear fusion and molecular assemblers are both viable technologies and may only be about 50 years away.

In a world with limitless energy and the means to create anything that we wanted, nothing is scarce. We could immediately create anything that we want in order to fulfill our wants and needs. And it’s that fact which would render economics redundant. If everything costs nothing to make, why would you need money?

Passage
Creative Commons License photo: fdecomite

So what would be the effect of such technologies on society? Wealth is more or less meaningless and there is no reason for money to exist, so there will be no such things as city stock traders or economists. In fact, anyone working in the primary and secondary sectors would be made redundant by replicators. The important people in such a society would be the scientists and engineers: in a world where we aren’t limited by resources, we are only limited by our ideas. Scientists and engineers are the people who will come up with those new ideas.

At first glance, the utopian society as described in ‘Star Trek’ can seem like a communist society which would never function in the real world. I believe that today we are beginning to see the glimpses of technology which would bring society into a new age where we are no longer constrained by resources, scarcity and economics. The only constraints would be our ideas and dreams. Gene Roddenberry’s dream of our futuristic society might not seem so farfetched afterall.

Why is popcorn at the cinema so expensive?

Popcorn
Creative Commons License photo: PPDIGITAL

Why is popcorn at the cinema so expensive? At my local cinema, you’d expect to pay about £3 ($6) for some popcorn or about £8 ($16) for a meal deal including maybe a hot dog and nachos. This is absolutely extortionate given you can get popcorn for a third of the price at the supermarket just across the road and for £8 you could get a decent sit-down meal at a good restaurant.

So is this a rip off for consumers? In this article, I discuss the issue of expensive popcorn, how it can be explained with price targeting and suggest that isn’t a rip off at all.

A cup of coffee…

Let us imagine a cup of coffee which costs £1 to produce.

There are 6 consumers who all value the cup of coffee differently. Person A is willing to pay £1 for a cup of coffee, going all the way up to Person F who would be willing to pay £3.50 for a cup of coffee.

The shop decides to charge £2 for a cup of coffee so for every cup of coffee sold the shop makes a profit of £1. As we can see in the table, Persons A and B would not buy the coffee because it costs more than what they would be willing to pay. 4 people would buy the coffee, giving the shop a total profit of £4.

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Let’s increase the price…

Of course, the owner of the coffee shop wants to increase his profits. So he could increase the price of a cup of coffee: say to £2.50.

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What’s happened? Well, Person C no longer wants to buy a cup of coffee as it would cost more than they were willing to pay. Persons D, E and F will continue to buy the cup of coffee. The coffee shop sells 3 cups of coffee and makes a total profit of £4.50. The downside is that Person C no longer has access to a cup of coffee.

We could try increasing the prices further with the aim of trying to increase profit. If the price of coffee rose to £3, the profit on each cup of coffee is £2. But only Persons E and F would buy it, giving a total profit of £4.

As we can see, the optimal price to charge is £2.50. This would give the coffee shop maximum profit without using price targeting.

What if we use price targeting?

My argument lies around “price targeting”. What exactly is price targeting? It means charging people exactly what they are willing to pay. Take the following scenario:

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So what has happened here?

Well, every single person now has access to a cup of coffee at the price that they would be willing to pay. Not only that, but the shop has managed to increase it’s profit to £7.50: almost double what it could have made without price targeting.

Leakages

But there is a big problem with this plan which economists call “leakages”. How can the firm know exactly how much customers are willing to pay? They could ask the customers but everyone would say they were willing to pay the bare minimum figure: £1. Because who would pay more than they would have to for some coffee? So we end up with the following scenario where everybody ends up paying the bare minimum:

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Everyone has access to a cup of coffee. But it costs £1 to make a cup of coffee and everybody pays £1: the shop owner makes no profit at all.

The problem with this form of price targeting is that people will find ways to abuse the system. Everybody will pay the bare minimum. This is why you won’t see it used this way in practice: when was the last time you sat down at a restaurant where you could pay however much or little as you wanted?

There are several ways that companies can implement price targeting without explicitly asking you how much you’d be willing to pay. I would like to argue that popcorn at the cinema is one example.

Popcorn as a form of price targeting

Midnight theater
Creative Commons License photo: Midnight-digital

At the start of this article, I said that popcorn was a form of price targeting. Why?

Everybody would love popcorn and a drink to go with a film. If you don’t believe me ask yourself the following question: if I was given a free popcorn and drink with my cinema ticket would I take it? For most people, the answer will be a resounding yes.

Let’s say it costs the cinema £5 to screen Indiana Jones. For £9 my local cinema could provide everyone with a film and a popcorn.  For every ticket sold, they make a profit of £4. But instead they offer two options:

£7 – Film Only
£10 – Film and Popcorn

Let us imagine a customer who is willing to pay £8 to see Indiana Jones. In the original scenario without price targeting, everybody is charged £9. Since he is only willing to pay £8, he won’t go to the cinema: it’s too expensive. But if the cinema offered a £7 option, he will now decide to go. The cinema will make a £2 profit.

Let us imagine another customer willing to pay £12. He will go for the “film and popcorn” option at £10. It’s essentially exactly the same product: the popcorn only costs pennies to produce. But there is sufficient difference between the two options that the customer won’t “leak” into the £7 group.

Jazz. Cool.
Creative Commons License photo: DMBFreakNo41

Why aren’t you allowed to take your own food and drink into the cinema? Because that’d cause £10 customers to “leak” into the £7 group.

Conclusion

Popcorn is a form of price targeting: a way of charging people the amount they are willing to pay. I have shown that this not only leads to increased profits for the cinema chain, it also means the cinema is affordable to a lot more people. Of course popcorn doesn’t cost £3 to produce. But that expensive popcorn serves an important purpose in allowing price targeting to work. Ultimately, consumers benefit from great access to the cinema.

Based on research from an article at Physorg.

£100,000 – the real cost of going to university

nature x2
Creative Commons License photo: B a m s h a d

As a student currently embarking on a university degree, I’m looking forward to the freedom university will offer and meeting a whole bunch of new people from across the world. But one major worry is the finance: the cost of going to university.

Many people only look at tuition fees when they think about going to university. In the UK, university tuition is roughly £3,000 a year. For a 4 year masters degree course, this adds up to £12,000.

Tuition Fees: £12,000

 

But there’s the cost of accommodation, which is typically at least as large as the tuition costs. The cost of accommodation varies. In some of the larger cities, a room will typically cost £120/week. In some smaller town universities, £80/week might be closer to the norm. A 40-week let on university accommodation will set you back £4,000 a year. However, in later years of university, most students will live outside of university halls and this will be more expensive. Assuming an average accommodation cost of £4,500 per year, this adds up to £18,000 over a 4 year degree course.

Accommodation Cost: £18,000

 

sheffield, hidden sunrise
Creative Commons License photo: paolo màrgari

There is a much bigger cost which most people don’t even think about. Because studying at university and getting a full-time job are mutually exclusive options, by choosing to go to university you are actually saying “I will not be going to work” as well as “I will be going to university”. Economists call this the opportunity cost.

By choosing to study at university, you are foregoing 4 years of salary which you would have earnt otherwise. The typical starting salary for somebody leaving school with A-Levels but no university degree is £15,000 a year. By working, you’d potentially have earnt £60,000.

Opportunity Cost: £60,000

 

The other significant cost which needs to be considered is housing. Over the last few years, house prices in the UK have been rising by about 10% a year. What this means is that a house which will cost £100,000 today will cost £110,000 this time next year. Leaving university with £30,000 of debt and without £60,000 of salary means that university graduates must wait even longer before they can put together a deposit and get a foot on the housing ladder. On top of that, graduates may have to take out a larger mortgage on their first home because they cannot make a large upfront payment. Obviously, the appreciation in housing value depends on market conditions, but I think £10,000 is a reasonable ballpark estimate.

Housing Appreciation Cost: £10,000

 

So to sum it all up, when we take in all the costs of university:

£3,000 a year for tuition X 4 years = £12,000
£4,500 a year for accommodation X 4 years = £18,000
Direct Financial Costs: £30,000

£15,000 a year could have earnt in basic non-graduate job X 4 years = £60,000
Opportunity Cost: £60,000

House price rise in the additional time you must wait before buying = £10,000 (obviously this depends on whether house prices are rising)
Housing Appreciation Cost: £10,000

Total Cost of going to university: £100,000

It’s pretty depressing reading. University is a very, very expensive enterprise. It’s easy to see from these calculations why so many lower income families find it very difficult to send their children to university.

Flying Caps
Creative Commons License photo: Thiru Murugan

But I think it also calls into question whether it’s worth going to university to study certain degrees. According to the government’s graduate prospects website, graduates in humanities earn £51,549 more in their lifetime and graduates in arts earn £34,949 more. Are the real costs of going to university greater than the benefits?

On average for all degree courses, those who graduate from university earn on average £160,000 more over their lifetime. This would still seem to indicate that going to university is good value for money. But the net benefit is probably less than people would think.

I really don’t want to put anybody off studying at university and I don’t think money should ever stop anybody from pursuing their dreams. But what is true is that going to university is an extremely expensive enterprise these days and students may be getting a bit of a raw deal.

Cuba the only sustainable developed country in the world

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Creative Commons License photo: Topyti

The World Wildlife Fund’s Living Planet report (full report as PDF) is an interesting read. Page 19 of the report contains an interesting observation. The graph plots Human Development Index against Ecological Footprint.

The Human Development Index is the UN’s measure for standard of living and development. “Human Development Index (HDI) is an index combining normalized measures of life expectancy, literacy, educational attainment, and GDP per capita for countries worldwide.” The threshold for acceptable human development is defined as a HDI of 0.8.

The Ecological Footprint measures the use of natural resources and effects on the ecosystem.

It compares human consumption of natural resources with planet Earth’s ecological capacity to regenerate them. It is an estimate of the amount of biologically productive land and sea area needed to regenerate (if possible) the resources a human population consumes and to absorb and render harmless the corresponding waste, given prevailing technology and current understanding.

An ecological footprint of 1 means that if everybody in the world made use of resources in the same way as the citizens in this country, the Earth could just sustain it. An ecological footprint of 2 means two planet Earths would be needed to sustain this lifestyle if everybody in the world lived like this. Of course, if the ecological footprint is more than one planet Earth, this lifestyle is not sustainable.

The Car in front is a Desoto
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As you’d expect, the two are correlated. The higher the standard of living, the greater the ecological footprint.

It’s interesting to note that the only country which is sustainably developed is Cuba. If everybody on Earth was to adopt the Cuban lifestyle, everybody would have an acceptable standard of living and we would be operating at 80% of our planet’s ecological capacity.

What this suggests is that if everybody in the world adopted the lifestyle of US citizens, we would need more than 5 planet Earths to sustain it. The USA is obviously appropriating well more than it’s fair share of natural resources.

Of course, I’m not seriously suggesting we all adopt Cuban laws and lifestyles but I think it’s a good way of visualising how sustainable the lifestyles of different countries are. Perhaps there are a few ideas we could adopt from Cuba though.

The Problem with Fuel Taxes and Road Pricing

8th Ave .....Midtown Manhattan
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Congestion and pollution are two “external costs to society” which are associated with driving. When you take your car out of the garage and take a trip down to the local supermarket or pick up the kids from school, you are imposing costs on other people: exhaust fumes which others must breathe and you take up space on the road contributing to traffic jams.

To correct for social costs, governments use taxes to make sure the individual pays for the costs they impose on society or to “internalise the external costs”. There are three taxes which are used to try and discourage driving:

  • VAT on Buying a Car
  • Road Tax
  • Fuel Tax

People hate taxes. People remark that death and taxes are the only two certain things in life and I think that fuel tax is one of the most hated (in the UK, fuel tax is 64p for every litre). The government argue that this fuel tax is to correct for “external costs” but I will argue that the fuel taxes is unfair and are targeting the wrong people.

The Costs of Driving

Comings & Goings
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Urban motorists impose greater external costs on society. City roads are full to their capacity and that means traffic jams everywhere. An extra car on the road is only going to make it worse. Congestion wastes everybody’s time. Secondly, population density is so much higher in cities meaning that the exhaust fumes produced will affect a lot more people. And not to mention noise pollution…

In contrast, rural roads are much quieter and less congested. Because there is so much spare capacity on the roads, an extra car on a rural road isn’t really going to add to congestion or effect anybody else. And although exhaust fumes are still emitted and noise pollution is still produced, it effects a lot less people: there are less people for it to affect.

So the external costs imposed by drivers in cities are greater than the external costs imposed by drivers in the country.

The effects of taxes

Beijing smog
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When you buy a car, you pay value added tax on the vehicle. To keep the car on the road, you must also pay road tax. Both of these taxes will discourage people to own a car because they increase the cost of owning one. But once you own a car and it’s licensed to drive on the road, these taxes will play no part in your decision about whether to use the car to drive to work or not: whether you use it or not you’ve already paid the tax. And whether you live in the city or the country you pay the same amount of VAT and road tax.

The other tax is fuel tax. This affects people’s decision on whether to drive to work or school. If it costs £2 to drive to work you might choose to do it every day but if it cost £8 you’d probably only drive if it was raining or for some reason the trains weren’t operating.

As I’ve mentioned, the external costs of urban driving are greater. So a fair tax which “internalises external costs” should penalise urban drivers more. But the taxes on urban driving are actually lower than taxes on rural driving. Places in the city are situated much closer to each another and so less fuel is needed to drive between them. As the amount of tax paid is directly linked to the amount of petrol used, this means urban motorists are paying less tax than rural motorists. This is unfair.

Is it essential to drive?

Il terzo occhio
Creative Commons License photo: fabbio

Another factor that economists must consider is “how necessary is it to drive?”

In the city, there are a huge range of alternatives to driving. In London, there is a flat rate 90p charge on all bus journeys, where ever in London you go. Buses are also very frequent: you shouldn’t have to wait any more than 10 minutes. I’ve found that I rarely have to wait more than a few minutes.

When I’m in the country, it often costs £3 for a single bus journey and the bus only comes once an hour or sometimes even every 2 hours. And there is about a 20 minute window for the time that the bus arrives.

In the city, everything is also much closer to each another. That makes cycling or walking a much more viable option.

So in the country there is often no choice except from to drive because everything is so far away from each another and there are no viable public transport options. In these areas, motorists must pay extortionate amount of taxes. Meanwhile urban city drivers, with the luxury of viable alternatives such as the bus, escape with lower amounts of tax. I think this is the fundamental unfairness of fuel tax.

Solving the problem

Sam Houston Tollway
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The problem is that fuel tax penalises the wrong people. The solution is to tax urban drivers more to account for the greater amount of “external costs” they impose by driving.

In London we also have the congestion charge zone (£8 to enter Central London per day) and the low emission zone (£200 per day for heavy polluting vehicles to enter London). I think this somewhat solves the issue but it’s only restricted to London.

A few years ago the Labour government floated plans for a national road charging scheme.

Motorists will receive regular bills, possibly monthly, charged at variable rates by time and geography: rural country lanes would likely be charged at the bottom of the range, around 2p a mile, with inner city rush hour roads attracting the top £1.30 rate. The government hopes motorists will change their driving habits – by staggering journeys, sharing cars or switching to public transport – to the extent that there could be a 50% cut in congestion.

From a point of view of an economist, I feel that this is the perfect solution to the problem. It would reduce congestion which would lead to time savings for everybody and stop country motorists from being unfairly penalised.

In 2007, 1.7 million people signed a petition against the national road charging scheme. The idea seems to have fallen from the agenda. Because of the inherent unfairness in fuel taxation, I hope the government will reconsider a national road charging scheme.